Category Archives: France

Updates on Fed swap lines

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Still don’t have totals for Fed USD swap lines extended to Foreign CBs.

Some info here from last week:

ECB Lending, Liabilities Surge to Records Amid Crisis (Update 1)

By Simon Kennedy

Oct. 21 (Bloomberg) — The European Central Bank’s lending to banks and its exposure to possible collateral losses jumped to records last week as the battle against the credit crisis forced policy makers to shoulder more risk.

The Frankfurt-based ECB said it loaned banks 773.2 billion euros ($1.02 trillion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September. Its liabilities to financial institutions rose to 470.3 billion euros, an increase of 4.4 percent from the previous week and up 123 percent since the start of last month.

While I’m less concerned over the ECB’s increased Euro lending it nonetheless indicates problems have not subsided.

The ECB is following the Federal Reserve and other central banks in combating the credit crunch by expanding its balance sheet as it injects more cash into the banking system. The downsides include taking on more risk as it accepts weaker collateral when lending.

“The urgency of the situation means that drastic measures need to be taken,” said David Mackie, chief European economist at JPMorgan Chase & Co. “Up until a month ago the balance sheet wasn’t growing. Now the bank is creating more and more money.”

The ECB became more aggressive after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 prompted banks to hoard cash worldwide. To spur lending, the central bank has loaned money for longer timeframes and offered banks unlimited amounts of dollars and euros. It last week loosened rules on the collateral it will accept when making loans to include lower-rated securities, certificates of deposit and subordinated debt.

Demand for Cash

The ECB today said it loaned banks 305 billion euros in its regular weekly auction at a fixed rate of 3.75 percent. It also provided $101.93 billion in a 28-day dollar tender at a fixed rate of 2.11 percent, and an additional $22.6 billion, also for 28 days, via a currency swap against euros.

Don’t know what the total USD advances outstanding are.

With the financial crisis spilling over into the economy, demand for banknotes has also jumped. The value of notes in circulation rose to 721.8 billion euros, an increase of 9.7 billion euros from the previous week and 5.4 percent from the start of last month, today’s ECB data showed.

The eurozone is facing a ‘bank run’ as depositors flee to actual cash. This puts the banking system at risk with their current institutional structure.

When Lehman Brothers sought bankruptcy protection, its Frankfurt division owed between 8 billon euros and 9 billion euros to the ECB, the Wall Street Journal reported Oct. 7, without saying where it obtained the information.

ECB President Jean-Claude Trichet has said that while the bank is assuming more risk, it is doing so because of the greater threat of financial meltdown. “We have made decisions which are increasing our risks,” Trichet said in an Oct. 19 interview with France’s RTL Radio. “We are facing a systemic liquidity problem of first importance.”

The ECB’s risk-taking may be paying off. The cost of borrowing euros for three months fell to the lowest level today since Lehman filed for bankruptcy. The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers’ Association said. That’s the lowest level since Sept. 12. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve’s target for the first time since Oct. 3.

This would be near my last choice of ways to get term rates down!


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France injects €10.5bn in the six largest banks

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If growth continues to slow down this won’t be nearly enough to cover capital yet to be lost.

Also, with more slowing, the French deficit widens threatening their solvency and ability to fund:

France injects €10.5bn in the six largest banks; doubts about the 2009 GDP growth forecast

The French Finance Ministry said Monday night that the French government will inject E10.5 billion worth of fresh capital into the country’s six largest banks between now and the end of the year by purchasing subordinated debt securities.

Credit Agricole will get €3 billion, followed by BNP Paribas with €2.55 billion, Societe Generale with $1.7 billion and Credit Mutuel with €1.2 billion. Les Caisses d’Epargne will get €1.1 billion and Banques Populaires €950 million.

The banks have agreed to sell subordinated debt securities in those amounts, and they will carry a risk premium of about 400 basis points.


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European leaders vow Bank guarantees, bid to stop financial rot

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Hopefully this will buy some time to hope for a general recovery of output and employment that contains the national deficits.

This plan is also coordinated but still relies on the national government’s balance sheets.

European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

By James G. Neuger

Oct. 12 (Bloomberg) — European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a
commitment to recapitalize any “systemically” critical banks in distress.


All good, but depends on national governments for funding.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk,

Or how much the national governments are able to spend before markets stop funding them.

leaving unclear the ultimate cost to the taxpayer.

Also, these are not fiscal measures that directly add to demand.

Nor do they address the need to fund in USD which the eurozone nations don’t have.


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Germany to insure all bank deposits?

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(an email exchange)

Right,

If everyone in Germany tries to take their funds out of the banks they won’t get it, with or without the backing of the German government.

German government insurance can buy them some time, maybe even enough time to make it through if aggregate demand wasn’t falling off so fast.

In the U.S., U.K., Japan and any nation with its own currency and fiscal authority behind the deposit insurance you can get all the funds you want on demand.

> 
>   Finally, the Germans seem to get it. This might be the best news of the
>   weekend. But they need to take the final step. Problem is there
>   is no EU treasury or debt union to back up the single currency.
>   The ECB is not allowed to launch bail-outs by EU law.
> 
>   Each country must save its own skin, yet none has full control of
>   the policy instruments. How do they change this in a hurry?
> 

With great difficulty!

Germany draws up contingency plans for state rescue of banks

By Bertrand Benoit

The German government was last night drawing up a multi-billion euro contingency plan to shore up its banking system, which could see the state guarantee interbank lending in the country and inject capital in its largest banks.

The contingency draft, closely modelled on the British initiative announced this week, marks a dramatic political U-turn for Europe’s largest economy after Angela Merkel, chancellor, and Peer Steinbrück, finance minister, both ruled out a sector-wide state rescue for banks this week.

A senior government official said Ms Merkel and Mr Steinbrück would decide on Sunday which of the measures to implement after consultation with their European partners. Once a political decision was made, he said, the plan could be implemented in the following days.

“We are considering all the options at present to the exception of a massive state acquisition of toxic assets,” the official said. “Whatever we do will be done in close co-operation with our G7 and European partners.”

France announced last night that it was planning an emergency European Union summit tomorrow.

Speaking in Washington ahead of a meeting of Group of Seven finance ministers, Mr Steinbrück said the time had now come for “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted.”

The official said Ms Merkel was in daily contact with Nicolas Sarkozy, French president, suggesting that the plan, if approved, could be launched as a joint initiative.

Ulrich Wilhelm, the government spokesman, said: “It is the duty of the federal government to be prepared and to review all options . . . As of now, no political decision has been made.”

Under the draft, Germany could issue a state guarantee for interbank lending worth more than €100bn and provide direct lending to the banking sector. Berlin is also contemplating offering several dozen billion euros of capital to the banks in exchange for equity and may take entire ownership of some institutions.

As an additional option, the government is considering extending the blanket guarantee it issued last Sunday for account deposits to money market funds, which have experienced a steep outflow of savings lately. Fund managers have had to divest considerable quantities of assets to cover the withdrawals.

Bankers said the interbank lending market in Germany had reached near-gridlock.


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EU CDS

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EU Credit Default Swaps

Country 5 yr. 5 yr. 10 yr. 10 yr.
Germany 20 25 26 31
Italy 69 79 82 92
France 26 31 32 37
Spain 61 71 74 84
United Kingdom 31 41 39 49
Greece 78 88 90 100
USA 27 33 34 40
Portugal 61 71 74 84
Finland 20 30 27 37
Ireland 64 74 68 78
Netherlands 23 33 29 39
Belgium 39 49 49 59
Sweden 28 38 36 46
Austria 28 38 37 47
Norway 12 20 18 26
Denmark 30 40 37 47


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Ambrose Evans-Pritchard: Europe’s banks more leveraged than U.S. banks

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Ambrose Evans-Pritchard: Europe’s banks more leveraged than U.S. banks

By Ambrose Evans-Pritchard

Oct. 2 (The Telegraph) It took a weekend to shatter the complacency of German finance minister Peer Steinbruck. Last Thursday he told us that the financial crisis was an “American problem,” the fruit of Anglo-Saxon greed and inept regulation that would cost the United States its “superpower status.” Pleas from US Treasury Secretary Hank Paulson for a joint US-European rescue plan to halt the downward spiral were rebuffed as unnecessary.

By Monday, Mr Steinbruck was having to orchestrate Germany’s biggest bank bailout, putting together a E35 billion loan package to save Hypo Real Estate. By then Europe was “staring into the abyss,” he admitted. Belgium faced worse. It had to nationalise Fortis (with Dutch help), a 300-year-old bastion of Flemish finance, followed a day later by a bailout for Dexia (with French help).

Within hours they were all trumped by Dublin. The Irish government issued a blanket guarantee of the deposits and debts of its six largest lenders in the most radical bank bailout since the Scandinavian rescues in the early 1990s. Then France upped the ante with a E300 billion pan-European lifeboat for the banks. The drama has exposed Europe’s dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against “le capitalisme sauvage” of the Anglo-Saxons.

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for “regulatory capital relief rather than risk mitigation.” In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of “off-books” chicanery than the Americans. Mr Paulson may have saved Europe.

As suspected. This has always been the case. Remember the French banks, pre-euro, periodically announcing massive losses, and the French government writing the check, back when they had their own currency so all it did was add a bit to inflation?

Most eyes are still on Washington, but the core danger is shifting across the Atlantic. Germany and Italy have been contracting since the spring, with France close behind. They are sliding into a deeper downturn than the US.

The interest spreads on Italian 10-year bonds have jumped to 92 points above German Bunds, a post-EMU high. These spreads are the most closely watched stress barometer for Europe’s monetary union. Traders are starting to “price in” an appreciable risk that EMU will break apart.

The European Commission’s top economists warned the politicians in the 1990s that the euro might not survive a crisis, at least in its current form. There is no EU treasury or debt union to back it up. The one-size-fits-all regime of interest rates caters badly to the different needs of Club Med and the German bloc.

The euro fathers did not dispute this. But they saw EMU as an instrument to force the pace of political union. They welcomed the idea of a “beneficial crisis”. As ex-Commission chief Romano Prodi remarked, it would allow Brussels to break taboos and accelerate the move to a full-fledged EU economic government.

As events now unfold with vertiginous speed, we may find that it destroys the European Union instead. Spain is on the cusp of depression. (I use the word to mean a systemic rupture.) Unemployment has risen from 8.3 to 11.3 per cent in a year as the property market implodes. Yet the cost of borrowing (Euribor) is going up. You can imagine how the Spanish felt when German-led hawks pushed the European Central Bank into raising interest rates in July.

This may go down as the greatest monetary error of the post-war era. The ECB responded to the external shock of an oil and food spike with anti-inflation overkill, compounding the onset of an accelerating debt deflation that poses a greater danger. Has it committed the classic mistake of central banks, fighting the last war (1970s) instead of the last war but one (1930s)?

After years of acquiescence, the markets have started to ask whether the euro zone has the machinery to launch a Paulson-style rescue in a fast-moving crisis. Who has the authority to take charge? The ECB is not allowed to bail out countries under EU treaty law. The Stability Pact bans the sort of fiscal blitz that has kept America afloat. Yes, treaties can be ignored. But as we are learning, a banking system can implode in less time than it would take for EU ministers to congregate from the far corners of Euroland.

Looks like he has been reading my papers!

France’s Christine Lagarde called yesterday for an EU emergency fund. “What happens if a smaller EU country faces the threat of a bank going bankrupt? Perhaps the country doesn’t have the means to save the institution. The question of a European safety net arises,” she said.

The storyline is evolving much as euroskeptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter.


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Eurozone on the Brink

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Hi Joseph,

Agreed, and this attitude continues this morning, with comments like ‘Europe needs this slowdown to bring down inflation’ as their opinion leaders argue against a rate cut (not that a rate cut would actually help demand as they think it would, but that’s another story).

It seems they are actually welcoming this weakness, probably out of fear unemployment was getting far too low to ‘discipline’ the unions, as wage demands were anecdotally featured in the Eurozone news.

France’s proposal for a 300 billion euro wide fund to calm bank depositors was immediately shot down by Germany (not that it would have or could have been sufficient to stop a run on the banking system, but that too is another story).

It is also becoming more clear that effectively major euro lending institutions have found themselves massively ‘long’ euros and ‘short’ dollars. The Fed’s swap lines have grown to over $600 billion, mainly with the ECB. This means the ECB is borrowing USD from the Fed to lend to its banks. This represents the same kind of external debt that has brought down currencies since time began. Running up external debt to sustain your currency is highly unlikely to succeed.

Ultimately, their only exit is to sell euros and buy the USD needed to cover their net USD needs. The resulting fall in the currency can spiral into a serious run on the banking system. Unlike Americans who run to high quality securities in their local currency when they get scared, Europeans and their institutions tend to flee the currency itself.

While the national governments will attempt to contain any such run, they don’t have the capability, as they are all limited fiscally by both law and market forces, with the latter the far stronger force. Only the ECB can write the check of the size needed, no matter how large, but they are currently prohibited by treaty from making such a fiscal transfer.

I have serious doubts the Eurozone can get through this week without entering into a system wide banking crisis that will end with the payments system being closed down until it reopens with bank deposit insurance at the ‘federal level’- in this case from the ECB itself.

The Eurozone would have been ‘saved’ if the US has responded with a fiscal response in the range of 5% of GDP, and continued to increase imports and keep the world export industries alive.

But that didn’t happen, and, by design, that channel was cut off when Paulson, supported by Bernanke and Bush, managed to convince foreign central banks to stop accumulating USD reserves.

This both killed the goose laying the golden eggs for the US (imports are a real benefit and exports a real cost), as US exports have boomed and real terms of trade fell, and also triggered the looming collapse of the Eurozone as exports fell off and domestic demand remained weak.

Good morning!


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Bloomberg: Trichet says U.S. must pass plan to rescue ‘Global Finance’

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Interesting how Europe feels its fate is in the hands of the US.

The Euro was supposed to change all that.

Yes, the national governments know they are constrained fiscally by their self imposed 3% deficit limits. And they also suspect that they are further limited by market forces that may decide not to buy the national government securities and cut off their ability to borrow to spend. The national governments are in that respect similar to the US states which are currently pro-cyclically cutting spending due to funding constraints due to lack of income.

Unlike the US and the UK, in the Eurozone the national governments are providing the deposit insurance for their banks.

It can all come apart very quickly.

They can blame the US, but the fault lies with their failure to be able to sustain domestic demand, which they built into the treaty 10 years or so ago.

Good chance market forces will ultimately force modifications to the treaty.

My highlights in yellow below:

Trichet Says U.S. Must Pass Plan to Rescue `Global Finance’


by Andreas Scholz and Gabi Thesing
Oct. 1 (Bloomberg) European Central Bank President Jean-Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for banks to shore up confidence in the global financial system.

“It has to go, for the sake of the U.S. and for the sake of global finance,” Trichet said in an interview in Frankfurt with Bloomberg Television late yesterday. “I am confident, but of course it is the decision of the U.S. Congress.”

President George W. Bush and Senate leaders yesterday vowed to revive a plan aimed at buying distressed assets from banks that was rejected by Congress a day earlier. The vote roiled markets already struggling to cope with the collapse of Lehman Brothers Holdings Inc. European governments have helped rescue at least five banks since Sept. 28, with Trichet taking part in talks to save Belgium’s Fortis over the weekend.

Trichet said a pan-European approach to the banking crisis was unlikely, saying “we are not a fully-fledged federation with a federal budget.”

“Each country has to mobilize its own efforts,” said Trichet. “But of course there is a European spirit and that is the spirit of the single market.”

Trichet declined to answer questions about ECB monetary policy before tomorrow’s interest-rate decision. All 58 economists surveyed by Bloomberg News expect the central bank to
keep its benchmark rate at 4.25 percent.

European leaders are trying to better coordinate their response to the financial crisis. Luxembourg Finance Minister Jean-Claude Juncker said yesterday he expects to meet with Trichet and French President Nicolas Sarkozy on Oct. 4 to discuss “a more systematic approach.”

Trichet’s ECB has so far chosen not to follow the Federal Reserve in slashing interest rates since credit markets seized up 13 months ago, injecting cash into their markets instead, while keeping monetary policy focused on inflation.

Price Stability
“What’s needed is for us to continue to tell our fellow citizens that we will ensure price stability,” Trichet said in an interview broadcast yesterday on the France 2 television channel.

Belgium, the Netherlands and Luxembourg on Sept. 28 agreed to inject 11.2 billion euros ($16 billion) into Fortis, the largest Belgian financial-services company.

Governments and other authorities have also taken steps to protect the U.K.’s Bradford & Bingley Plc, Brussels and Paris-based Dexia SA, Iceland’s Glitnir Bank hf and Germany’s Hypo Real Estate Holding AG. Ireland yesterday guaranteed the deposits and borrowings of six lenders.


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